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Why interest rates are so low

Jan 24, 2011 | | Comments (1)

Dear Liz: Why are banks not offering a higher interest rate for savings accounts? Why so darn low?

Answer: Blame the economy. Both individuals and businesses are wary about borrowing money. Less demand typically drives down the cost of a product. The product in this case is loans, and the price is the interest rate. With little demand for loans, banks don’t need to compete much for depositor funds and so aren’t paying much on their deposit accounts.

Another big factor is the Federal Reserve, which is keeping interest rates low to try to stimulate borrowing, spending and the economy. The Fed’s big fear is that higher interest rates would choke off the economy’s recovery and send us spiraling into another recession.

How long will this low-interest period last? Nobody knows. We could see higher interest rates if the economy really takes off. In that case, higher demand for loans probably would bid up interest rates and the Fed would switch its focus to containing inflation, which typically means it would try to raise rates further. Many economists are predicting a slow recovery, however, which means low savings account rates are likely to be with us for a while.

In the meantime, you can look for slightly higher rates at sites like MoneyRates (http://www.money-rates.com) and Bankrate.com. Recently the national average for one-year certificates of deposit was under 0.5%, but several financial institutions on those sites were offering rates above 1%.

If you’re being offered rates much above that level, you’re either dealing with a riskier investment or being asked to lock up your money for a considerable period. Neither is a good idea if this money is your emergency fund or you otherwise need it to be safe and accessible.

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Categories : Banking, Q&A, The Basics

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